Interpreting Total Return in Alpha Strategy Backtests

Summary

The document raises a practical question about how a simulation platform calculates the total return of an alpha strategy over a long backtest. The user describes an alpha that may generate stock weights and asks how those weights become a portfolio return across successive trading windows, such as hourly or daily intervals. The example compares an initial portfolio value with an ending value, but does not provide enough information to infer the platform's formula.

No answer or calculation method is included. In general, interpreting a backtest's cumulative return requires knowing how the signal maps to positions, how holdings are rebalanced, and how returns are compounded across periods. Fees, slippage, financing, cash treatment, and the definition of the reported portfolio value can also affect results, but the document does not say whether the platform includes them. It is therefore a useful prompt about backtest methodology, not an explanation of a specific platform's calculation or evidence that its reported result follows any particular convention.

Key ideas

• An alpha signal may be converted into portfolio weights before returns are calculated.
• Cumulative backtest return depends on how period returns are combined over time.
• Rebalancing frequency affects how a strategy's holdings evolve.
• The document gives no platform-specific formula or answer.
• Costs, financing, and cash treatment are unspecified and may affect reported performance.

Tags

# How is the total return of an alpha strategy being calculated during backtesting?


# How is the total return of an alpha strategy being calculated during backtesting?












I am using a quant simulation platform and I have chosen a formulaic alpha to be used. Now the platform is backtesting and displaying the total return of the alpha strategy over 12 years. The trading window chosen can be 1 hour or 1 day.

The initial value of my portfolio was some 2.7 units and value at the end of 12 years was some 4 units. Now how is this total return over 12 years generally calculated ? It's not explicitly written on the platform but how is it generally done ? I guess my alpha strategy is being used to get weights for individual stocks to construct an initial portfolio. What happens after this ? Is the value of the same portfolio checked after 12 hours and the return is calculated or is something else being done to calculate the total return ?

P.S: The platform is very new and does not have this information explicitly written, so how is this generally done everywhere ?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.